Thirty year bond yield pointing to sluggish growth

Week ending Friday October 27th 2017

Lots of noise in equity markets make working out if any macro influences were at play very tricky. We know NASDAQ surged to record highs on Friday after the Thursday-night release of estimate-busting numbers from the big tech stocks. But … the broader S&P500 index was only flat over the week, as non-tech stocks had less exciting results earlier in the week. That meant the Friday gains merely cancelled out the earlier losses.

Tax cuts and Fed Chair still dominate

The big move in the S&P500 happened during the previous week on the hope of tax cuts coming through Congress, and that any fiscal boost from those tax cuts would not be offset by monetary policy. Monetary policy itself remains very much in play as Trump turns the appointment of the Fed Chair into a reality TV show. Apparently, he’s loving it.

Markets say Powell

The betting markets now make Jerome (he’s become so familiar now it’s “Jay”) Powell the clear favourite. Powell has no monetary economics experience but is a “markets man” with an education in law, a career in investment banking and private equity, plus straddling politics as a civil servant in the Treasury under George H.W. Bush.

He was an Obama nominee, but only as a centrist to balance more Democrat-leaning appointees. He has focused more on financial regulation since getting on the Fed Board in 2012 to complete someone else’s two year term and then being appointed for his own term in 2014.

USD up, but mainly due masterful Draghi

The USD is rallying hard now, particularly on Thursday after the ECB achieved a dovish tapering – although only reversing some of this summer’s politically induced weakness. The expectation was that the ECB would taper their QE to EUR30bn per month from January, but Draghi’s language was very calming, including a commitment not to raise rates for some time. The current, apparent, resurgence of RGDP growth in the Euro Area did not trouble him at all, and that was the news.

Euro Area NGDP growth is dragging up RGDP growth, but the implied deflator is still only just over 1% YoY in 2017Q2. NGDP growth has only just climbed above 3% again, having averaged 4.4% between 2000 and 2007. Do not even ask about the level trend!

The USD could also be rising again in line with US bond yields. The two-year yield is now at multi-year highs of 1.6% and both the 10yr and 30yr yields are also up, but nothing like as much. The 30yr bond yield is still looking remarkably bearish for long-term NGDP growth expectations. The continued trend towards a flat yield curve at such low levels of short rates is also bearish for NGDP growth expectations.

Even though one of our posts this week showed the rising trend in one measure of wages, this upward trend is partially offset by falling hours worked, capping personal income growth. There just is not enough money to establish a better trend in NGDP.

Data OK, not great

Durable goods orders and the first estimate of GDP growth for 2017Q3 both came out ahead of expectations but were nothing too exciting. NGDP growth crept back up to above 4% YoY and RGDP to nearly 2.3% YoY – but both remain well below the rates seen before the current tightening cycle which began in mid-2014. The USD recovery and the yield curve seem to be indicating the weakening trend in growth since 2014 will continue.

Next week sees a storm of surveys and data. The latter includes both September’s PCE figures and October’s payrolls. We may even get the promised appointment of a Fed Chair. My betting is on an outsider, not Powell – but only because the odds on outsiders are 100-1 while Powell is a 75% shoe-in making the pay-off very poor.


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